This paper studies the effect of microcredit uptake on household financial distress. Drawing on quasi-experimental survey data collected in urban Uganda, merged with bank administrative data on the same individuals, we find that on average, microcredit uptake increases financial distress.

Borrowers with low financial literacy levels take on loans (and installments) that are larger relative to their income. These findings are explained by a Roy-type model that incorporates financial literacy, and they suggest a role for numeracy skills assessment in credit scoring of loan applications.